Quick question… I know that if ability > willingness we are supposed to honor willingness and educate the client right? And if ability < willingness honor ability. Here is a review question in the back of the CFA books, it clearly states that their willingness to take risk is “below average”, yet they sum them up as having an average ability to take risk. “Muellers are in the middle-stage of the investor life cycle. Their income (relative to expense), total financial resources, and long time horizon give them the ability to assume at least an average, if not above average, level of investment risk. Their stated preference of “minimal volatility” investments, however, apparently indicates a below average willingness to assume risk. The large realized losses they incurred in previous investments may contribute to their desire for safety. Also, their need for continuing cash outflow to meet their daughter’s college expense may temporarily and slightly reduce their risk-taking ability. In sum, the Muellers’ risk tolerance is average.” I understand the explanation but it kind of violates the rule of thumb A>W honor W and if A
i see this rule of thumb in schweser’s “for the exam” section, but does it appear in the text at all? in the text, they mention a guy who’s willingness is initially lower than ability. Peter Inger. After his advisor reminds him of his greater ability to take risks, he increases his willingness to 15% volatility from 10%. So i think you can reconcile his lower willingness and higher ability by meeting in the middle, average… i acutally got this question correct, but now that you bring up this rule of thumb, i’m unsure… it’s a good question. anyone have a better explanation? please help.
the answer made sense and didnt contradict schweser’s rule of thumb, can you read the question more carefully ? it ask for risk tolerence not risk objective in the IPS ! Risk Tolerance based on 1) Source of wealth, 2) Measure of wealth, 3) Stage of life
umm. yeah. i think i’m having trouble reading. p114 in the curriculum where it says, “an individual’s risk objective, or overall risk tolerance, is a function of both ability to take risk and willingness to take risk”. please explain. thanks. for the record, i don’t think the answer is wrong. just trying to get it clear.
“Monki”, You are talking about Situational Profiling… From CFA pg. 100 “examples of situational profiling include approaches based on source of wealth, measure of wealth, and stage of life.” Before you start insulting people on this board why don’t you do some research and base your answer on facts not just your personal “wrong” opinion. “cfasf1” thanks for your thoughts, I think this material is best learned by doing as many questions as possible, sooner or later we will get the hang of it.